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Tuesday, 26 May 15
HOW HAS THE DROP IN OIL PRICES AFFECTED OTHER COMMODITIES? - CLYDE & CO
 KNOWLEDGE TO ELEVATE
The effects of the dramatic drop in the price of both Ice March Brent, the international oil marker, and its US counterpart Nymex March West Texas Intermediate, have been widespread. This is impacting not only the oil services industry, where many firms have cut their capital budgets as well as jobs, but also a number of markets across the world. The commodities market, in particular, has been widely affected with the prices of metals such as copper, lead and nickel dropping, albeit not as dramatically as oil, and the price of gold increasing.
In passing, it is worth noting that the death of King Abdullah in January 2015 prompted some investors to bet on a change in strategy as a result of the change in the leadership of Saudi Arabia, OPEC’s largest producer and de facto leader, with Crown Prince Salman succeeding King Abdullah. However, many analysts expect King Salman and Ali al-Naimi, Saudi Arabia’s oil minister, to stand by the existing Saudi oil policy, at least in the near term. That is, to allow market forces to determine the oil price and press ahead with unrestrained production of crude in order to eclipse more marginal producers and to not risk losing market share, despite the effects that this has had on the price of oil.
How has the drop in oil prices affected other commodities?
The sharp fall in oil prices amid deteriorating sentiment over the global economy has made investors weary of investing in other commodities.
Copper, in particular, has been hit very hard, slumping to its lowest price levels in nearly six years. This was triggered by aggressive selling by Chinese hedge funds earlier this month when the market was on the edge because of the collapse in the oil price and when physical demand in China was weak because of the approaching lunar New Year holiday. Other metals have also taken a hit, with nickel and lead experiencing recent sharp decreases.
As the price of oil has dropped, gold, on the other hand, has experienced its highest price level since August 2014 as many investors have sought to invest in the market to park their capital. With the Euro falling to an 11 year low as a result of a number of factors including the Swiss National Bank’s decision to decouple from the Euro and the European Central Bank’s quantitative easing measures, gold has risen very quickly.
On top of a growing trend for banks to dispose of their commodities businesses, there is a debate whether banks will continue to finance trading in commodities. Oil, at least in the near future, is likely to provide a low return with most commentators thinking that the price will not rise substantially for the foreseeable future, with some even going so as far as stating that the price will fall as low as USD20 per barrel. Therefore, the incentive for banks to finance this particular commodity would appear to have fallen away. This could see a space open for non-bank lenders to come into the market and play a much more active role in the financing of commodities. These entities are generally subject to less regulation and have access to a more diverse set of methods to inject capital into financings.
Impact on existing contracts
In the oil market, many, if not most participants will enter into hedging contracts against a price fluctuation. However, this is often a hedge against a rise in the oil price and some participants will, as a result of the current conditions, have found that they have been asked to make margin payments to hedge counterparties as they are ‘out of the money’ on the hedging contract.
Exit options?
Parties may find it difficult to remove themselves from their existing commodities contracts.
Force Majeure: A force majeure clause allows one party who has been subject to a pre-defined event to suspend performance under the contract, or , in a worst case scenario, allow one or both parties to terminate the contract. The key point to note is that performance by the affected party should be rendered impossible to perform (sometimes being severely hindered is also considered to constitute force majeure). Some parties may look to rely on this provision, however it is unlikely that the fall in oil prices will constitute a force majeure event under contracts.
Material Adverse Change clauses: There is a possibility that parties could look to material adverse change clauses in their agreements as a way of terminating their contracts. However, these clauses are usually drafted to concern the state of the individual contract participants (e.g. a party’s credit rating) rather than market realities. These provisions are also notoriously difficult to rely on in the event of a termination. Of course, if a party’s credit rating, for example, were to be affected because of the fall in oil prices, then this could provide an option for the other party to terminate under this type of provision.
What can parties do to counter the drop in oil prices?
It may be possible for parties to include, in future contracts, a clause which is effectively a ‘hedge’ to be triggered by a pre-determined event (for instance a defined rise or fall in the oil price, e.g. if oil drops below USDX per barrel). This could give parties the ability to re-price the contract in this event, to ensure the contract remains economically viable, or at least to be obliged to enter into good faith negotiations around re-pricing. Depending on the level of bargaining power between the parties, it may even be possible to incorporate such a fluctuation as a termination event.
Existing contracts could also be reviewed to see if there is the possibility of amending them to include such a clause, but re-negotiating an existing contract which does not have a contractual mechanism for this already built in would seem unlikely.
The full impact and the duration of the drop in oil prices remains to be seen; but what is certain is that this is a worrying time for the commodities market. Parties will have to consider the terms of their existing contracts as well as continuing to consider ways to mitigate risk when embarking on transactions in the future. This could include a renewed reliance upon derivatives as a way of protecting against price and foreign exchange risk.
Source: Clyde & Co | Hellenic Shipping News
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Tuesday, 14 November 23
CHINA'S BELT AND ROAD INITIATIVE TURNS AWAY FROM COAL - WOOD MACKENZIE
Ambitious, contentious and big spending, China’s Belt and Road Initiative (BRI) is 10 years old. In that time, China has splashed more than U ...
Friday, 10 November 23
THE COMMODITIES FEED: OIL UNDER PRESSURE - ING
Energy – Brent plummets
The oil market came under significant pressure yesterday. ICE Brent settled 4.19% lower on the day and ...
Friday, 10 November 23
COAL USE AT U.S. POWER PLANTS CONTINUES DOWNWARD SPIRAL; FULL IMPACT ON MINES TO BE FELT IN 2024 - IEEFA
This year, the use of coal by the U.S.’s power producers has been so anemic that the fuel has not achieved a 20% market share in any month so ...
Friday, 10 November 23
INDIA: NATIONAL COAL INDEX RISES 3.83 POINTS IN SEPTEMBER AMID HIGHER DEMAND - LIVEMINT
The National Coal Index (NCI) rose 3.83 points to 143.91 in September amid growing demand for coal.
The union coal ministry on Tuesd ...
Thursday, 09 November 23
WE'RE PRODUCING TOO MUCH COAL, OIL AND GAS, REPORT SAYS - WSJ
World leaders pledged in 2015 to reduce emissions in a combined effort to limit climate change.
Now they are stepping up production ...
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- Karaikal Port Pvt Ltd - India
- London Commodity Brokers - England
- Aditya Birla Group - India
- SMG Consultants - Indonesia
- Lanco Infratech Ltd - India
- The Treasury - Australian Government
- TNB Fuel Sdn Bhd - Malaysia
- Gujarat Electricity Regulatory Commission - India
- Miang Besar Coal Terminal - Indonesia
- Sical Logistics Limited - India
- Karbindo Abesyapradhi - Indoneisa
- Xindia Steels Limited - India
- Heidelberg Cement - Germany
- GAC Shipping (India) Pvt Ltd
- Semirara Mining and Power Corporation, Philippines
- Aboitiz Power Corporation - Philippines
- Indo Tambangraya Megah - Indonesia
- Kalimantan Lumbung Energi - Indonesia
- Wilmar Investment Holdings
- The University of Queensland
- Alfred C Toepfer International GmbH - Germany
- Vedanta Resources Plc - India
- Semirara Mining Corp, Philippines
- Independent Power Producers Association of India
- Indonesian Coal Mining Association
- Attock Cement Pakistan Limited
- Siam City Cement PLC, Thailand
- Indian Energy Exchange, India
- Anglo American - United Kingdom
- IEA Clean Coal Centre - UK
- Eastern Coal Council - USA
- Formosa Plastics Group - Taiwan
- GVK Power & Infra Limited - India
- Kartika Selabumi Mining - Indonesia
- Port Waratah Coal Services - Australia
- Straits Asia Resources Limited - Singapore
- Banpu Public Company Limited - Thailand
- TeaM Sual Corporation - Philippines
- Dong Bac Coal Mineral Investment Coporation - Vietnam
- Jindal Steel & Power Ltd - India
- Central Electricity Authority - India
- Meenaskhi Energy Private Limited - India
- Directorate General of MIneral and Coal - Indonesia
- PetroVietnam Power Coal Import and Supply Company
- Barasentosa Lestari - Indonesia
- Bhatia International Limited - India
- Ministry of Finance - Indonesia
- Indian Oil Corporation Limited
- Mercuria Energy - Indonesia
- Bahari Cakrawala Sebuku - Indonesia
- Georgia Ports Authority, United States
- Oldendorff Carriers - Singapore
- Renaissance Capital - South Africa
- Simpson Spence & Young - Indonesia
- Intertek Mineral Services - Indonesia
- Sindya Power Generating Company Private Ltd
- Tata Chemicals Ltd - India
- Salva Resources Pvt Ltd - India
- Jorong Barutama Greston.PT - Indonesia
- Asia Pacific Energy Resources Ventures Inc, Philippines
- VISA Power Limited - India
- Bangladesh Power Developement Board
- Therma Luzon, Inc, Philippines
- Uttam Galva Steels Limited - India
- Australian Commodity Traders Exchange
- Rio Tinto Coal - Australia
- Thai Mozambique Logistica
- Meralco Power Generation, Philippines
- Sakthi Sugars Limited - India
- European Bulk Services B.V. - Netherlands
- SN Aboitiz Power Inc, Philippines
- South Luzon Thermal Energy Corporation
- White Energy Company Limited
- Bulk Trading Sa - Switzerland
- New Zealand Coal & Carbon
- Sinarmas Energy and Mining - Indonesia
- Vijayanagar Sugar Pvt Ltd - India
- Dr Ramakrishna Prasad Power Pvt Ltd - India
- Dalmia Cement Bharat India
- Chettinad Cement Corporation Ltd - India
- Asmin Koalindo Tuhup - Indonesia
- Romanian Commodities Exchange
- Commonwealth Bank - Australia
- Kideco Jaya Agung - Indonesia
- Posco Energy - South Korea
- GMR Energy Limited - India
- Australian Coal Association
- Singapore Mercantile Exchange
- Star Paper Mills Limited - India
- GN Power Mariveles Coal Plant, Philippines
- Metalloyd Limited - United Kingdom
- Jaiprakash Power Ventures ltd
- Riau Bara Harum - Indonesia
- Sojitz Corporation - Japan
- Gujarat Mineral Development Corp Ltd - India
- Baramulti Group, Indonesia
- Tamil Nadu electricity Board
- Borneo Indobara - Indonesia
- CIMB Investment Bank - Malaysia
- MS Steel International - UAE
- Energy Development Corp, Philippines
- Truba Alam Manunggal Engineering.Tbk - Indonesia
- Savvy Resources Ltd - HongKong
- Bayan Resources Tbk. - Indonesia
- McConnell Dowell - Australia
- Agrawal Coal Company - India
- Deloitte Consulting - India
- International Coal Ventures Pvt Ltd - India
- Thiess Contractors Indonesia
- Rashtriya Ispat Nigam Limited - India
- Madhucon Powers Ltd - India
- Bukit Makmur.PT - Indonesia
- Timah Investasi Mineral - Indoneisa
- Krishnapatnam Port Company Ltd. - India
- Makarim & Taira - Indonesia
- Videocon Industries ltd - India
- Global Green Power PLC Corporation, Philippines
- Bhoruka Overseas - Indonesia
- SMC Global Power, Philippines
- Africa Commodities Group - South Africa
- Pendopo Energi Batubara - Indonesia
- Economic Council, Georgia
- Edison Trading Spa - Italy
- Maheswari Brothers Coal Limited - India
- Kepco SPC Power Corporation, Philippines
- Wood Mackenzie - Singapore
- Binh Thuan Hamico - Vietnam
- Marubeni Corporation - India
- Electricity Authority, New Zealand
- Energy Link Ltd, New Zealand
- Billiton Holdings Pty Ltd - Australia
- The State Trading Corporation of India Ltd
- Central Java Power - Indonesia
- Coalindo Energy - Indonesia
- Samtan Co., Ltd - South Korea
- Indika Energy - Indonesia
- Power Finance Corporation Ltd., India
- India Bulls Power Limited - India
- Filglen & Citicon Mining (HK) Ltd - Hong Kong
- Globalindo Alam Lestari - Indonesia
- IHS Mccloskey Coal Group - USA
- PNOC Exploration Corporation - Philippines
- PowerSource Philippines DevCo
- Siam City Cement - Thailand
- Global Coal Blending Company Limited - Australia
- Essar Steel Hazira Ltd - India
- Parry Sugars Refinery, India
- Toyota Tsusho Corporation, Japan
- Interocean Group of Companies - India
- Kapuas Tunggal Persada - Indonesia
- Trasteel International SA, Italy
- Kobexindo Tractors - Indoneisa
- Cement Manufacturers Association - India
- Mercator Lines Limited - India
- Maharashtra Electricity Regulatory Commission - India
- Mintek Dendrill Indonesia
- Cigading International Bulk Terminal - Indonesia
- Ind-Barath Power Infra Limited - India
- Ambuja Cements Ltd - India
- Chamber of Mines of South Africa
- Parliament of New Zealand
- Grasim Industreis Ltd - India
- Coastal Gujarat Power Limited - India
- Goldman Sachs - Singapore
- Manunggal Multi Energi - Indonesia
- Directorate Of Revenue Intelligence - India
- Sarangani Energy Corporation, Philippines
- Ceylon Electricity Board - Sri Lanka
- Medco Energi Mining Internasional
- Kumho Petrochemical, South Korea
- Latin American Coal - Colombia
- Kaltim Prima Coal - Indonesia
- Petrochimia International Co. Ltd.- Taiwan
- Electricity Generating Authority of Thailand
- Leighton Contractors Pty Ltd - Australia
- San Jose City I Power Corp, Philippines
- CNBM International Corporation - China
- Bukit Asam (Persero) Tbk - Indonesia
- ICICI Bank Limited - India
- Ministry of Mines - Canada
- Bharathi Cement Corporation - India
- Malabar Cements Ltd - India
- Carbofer General Trading SA - India
- Gujarat Sidhee Cement - India
- Pipit Mutiara Jaya. PT, Indonesia
- ASAPP Information Group - India
- Altura Mining Limited, Indonesia
- Ministry of Transport, Egypt
- Vizag Seaport Private Limited - India
- AsiaOL BioFuels Corp., Philippines
- Indogreen Group - Indonesia
- Orica Australia Pty. Ltd.
- Petron Corporation, Philippines
- Price Waterhouse Coopers - Russia
- Kohat Cement Company Ltd. - Pakistan
- Bhushan Steel Limited - India
- OPG Power Generation Pvt Ltd - India
- Standard Chartered Bank - UAE
- Antam Resourcindo - Indonesia
- Bank of Tokyo Mitsubishi UFJ Ltd
- Merrill Lynch Commodities Europe
- Mjunction Services Limited - India
- Offshore Bulk Terminal Pte Ltd, Singapore
- Coal and Oil Company - UAE
- Global Business Power Corporation, Philippines
- Sree Jayajothi Cements Limited - India
- Bukit Baiduri Energy - Indonesia
- LBH Netherlands Bv - Netherlands
- Iligan Light & Power Inc, Philippines
- Neyveli Lignite Corporation Ltd, - India
- Minerals Council of Australia
- PTC India Limited - India
- Eastern Energy - Thailand
- Holcim Trading Pte Ltd - Singapore
- Orica Mining Services - Indonesia
- Larsen & Toubro Limited - India
- Planning Commission, India
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